Rare Earth Elements (REE) have shown up on our radar as shares of Molycorp (MCP), one of the largest and only producers outside China, has doubled in the past month. REEs have no substitutes and are critical material inputs for high tech products, including iPhones, electric cars, wind turbines, and defense applications, such as precision guided munitions, lasers, and communication and radar systems.

As the chart below illustrates, China produces and controls almost all the world’s REEs. Because of their monopoly, we’re sensing (though still under the radar) a whiff of “Sputnik-esque” panic after the Chinese government blocked REE exports to Japan last Thursday as leverage to win the release of the fishing trawler captain, who was arrested on September 7 in the East China Sea. The fisherman was released Friday and flew back to China on Saturday.

“China shrewdly took advantage of a weakness in Japanese industry. But excessive global reliance on China for rare earths — it currently supplies 90% of the total — will not continue indefinitely…At the Mountain Pass rare-earth mine in the western U.S., which used to be the largest of its kind in the world, preparations to resume mining operations are under way with government support.”

Who operates the Mountain Pass mine? Molycorp. Though the company loses money, it is our sense the events of the past week have made the operational success of Molycorp a National Security issue. We have a modest position and will buy more on a pullback. Trade as a diplomatic weapon is a potential Black Swan we will monitor closely. Stay tuned!

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